De-Dollarisation, Multipolarity, and the Muslim World

(Originally written and published on personal Facebook on July, 2024)

Last year, the Malaysian government made it explicit that they are looking to increase trading in local currency, a gesture at de-dollarisation, aimed to reduce the reliance on the U.S. dollar. With the Malaysian ringgit falling to its lowest level since the 1997-1998 Asian financial crisis, Prime Minister Anwar Ibrahim has persisted that “Malaysia will be more active and aggressive in the use of ringgit (in trading).” 

It’s important to acknowledge that the country’s economic fundamentals did not necessarily cause the ringgit’s depreciation. Instead, it is due to multifaceted factors; financial speculation, illicit financial flows, and most importantly, the firm decision made by Bank Negara Malaysia’s policy to keep our interest rates low despite the aggressive interest rate hikes by the US Federal Reserve (Fed). 

Therefore, the call for de-dollarization and the amplification of the use of the Ringgit is apt and timely. More importantly, this move aligns with the current trajectory, especially among the Global South, as the world shifts away from U.S. hegemony and towards a multipolar order.

Since the end of World War II, and the establishment of the Bretton Woods Agreement, the global economy has accepted the US dollar as the world’s hegemonic currency. However, as the world became increasingly multipolar, a growing group of countries began questioning the significance of the dollar and US/European Union financial institutions. 

Escalating international conflicts, trade disputes, and the imposition of financial and economic sanctions pushed countries, especially from the Global South, to seek alternative means of payment and settlement beyond the US dollar.

Such sentiment is echoed by the President of Brazil, Lula da Silva’s proposal at the BRICS summit in South Africa in August last year. At his insistence, a commission was established to study the possibility of a new currency to replace the dollar in international trade. While currency swap agreements continue to be used as the “de-dollarisation” tool in the short term, the proposal signaled a serious desire for a long-term plan to move beyond the dollar hegemony. 

At the Valdai Club meeting in Sochi on October 5, 2023, Russia’s President Putin reiterated this desire by calling for a new “settlement system” beyond the Bretton Woods system. Russia has taken the forefront in the de-dollarization effort, receiving support from China, Iran, and economies across Latin America. Russia has already offloaded $80 bn in US securities and began seeking to settle trade with ASEAN countries in their local currencies in a bid to boost bilateral trade. 

Beijing’s de-dollarization agenda started as early as 2011 with a parallel initiative to promote its currency. The summit meeting in March between Russia’s president and China’s President Xi Jinping saw Putin stating “We (Russia) are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America.” More central banks have included the yuan in their foreign reserves, and bilateral trade between China and several states avoids US dollar-based transactions. 

It is important to recognize the strategic values of Muslim countries amid all these unprecedented transitions. In the parliamentary sitting last October, Prime Minister Anwar Ibrahim floated the idea of using gold dinar as a reserve currency. One should approach this idea cautiously, as its stability might be overestimated, and its usage could be limiting. 

However, it is beyond doubt that Muslim countries can be strategic partners in the de-dollarisation initiative. Russia’s Deputy Prime Minister Alexey Overchuk announced in May that they have been in active conversation with the countries in the Islamic world on current global shifts, including the processes of de-dollarisation. Russia has also expanded its financial ties to Iran after facing a wave of international sanctions due to its invasion of Ukraine.

The same approach was pursued by China, especially in the Gulf states. In March, China completed its first energy deal in yuan, involving approximately 65,000 tons of liquified natural gas (LNG) imported from the UAE. During the China-GCC summit in Riyadh in December 2022, 

President Xi Jinping of China unveiled plans to enhance oil and gas trade with Arab nations and employ the Shanghai Petroleum and Natural Gas Exchange for yuan-based transaction settlements. Additionally, China has put forward a proposal to extend its Cross-Border Interbank Payment System to the GCC region as an alternative to SWIFT.

Saudi authorities have shown openness to China's initiatives and have left the door open to the prospect of conducting oil trade in currencies different from the US dollar. During the Davos 2023 event, Saudi Minister of Finance Mohammed Al-Jadaan remarked: ‘There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal.’

It is indeed too early to claim that the US dollar is on the verge of collapsing. To break free from the constraints of dollarization, countries in the Global South must navigate a precarious path. 

However, the de-dollarisation movement creates an opportunity for developing countries, including the Muslim world, to develop a coherent third force, a force of peace, as the world experiences a geopolitical reordering not seen since the end of the Cold War or even World War II.